Quality mega caps in the FTSE 100 with hugely diversified revenue streams and global brands are the type of equites you most associate with the likes of Job Curtis, manager of the £1.1bn City of London investment trust.
Having steered the trust since 1991, and increasing its dividend every year, Curtis (pictured) has tended to favour the likes of Diageo, Unilever and big tobacco companies but the manager has dipped into more into mid-caps in the past year particularly in one sector which he says is where he is most bullish: house builders.
According to FE Analytics, the likes of Persimmon, Taylor Wimpey, Galliford Try, Barratt and Berkeley Homes have all produced enormous returns over the past three years, as shown in the graph below.
While Barratt and Taylor Wimpey have been the best performers with a return of nearly three hundred per cent, the others have still made at least a hefty 155 per cent return or so which is vastly more than the gain of the FTSE All Share.
Performance of stocks and index over 3yrs
Source: FE Analytics
Curtis said: “It has been the absolute star sector over the last year, although I bought in relatively recently. Taylor Wimpey I only bought in July 2014, Berkeley I bought in 2013 and Persimmon in 2012.”
The manager thinks while there is clearly a precedent for growth stocks that have done very, very well to have an inevitable period of underperformance, he thinks house builders should continue to boom over the medium term.
“These three stocks all have five year land banks and I just think the housing sector is in a very good place right now. With the growth in the economy and the growth in unemployment, there is a lot of demand for new houses and these companies are in a very strong position because of this and their land banks.”
“The private players are not getting the funding assistance they need from the banks and the government wants more houses to be built and also you're helped by Help to Buy to get on to the housing market.”
Despite his bullishness on the sector, Curtis is a expecting the huge gains to be heavily eroded at some point in the future as the way with all ‘cyclical stocks’.
“I have seen several bull markets and several bear markets for housing and you cannot forget that is a cyclical sector and there will be a moment to sell it, there is no question about that.”
“However, this is the best bull market I have ever seen because of the companies I own are returning some of their profits in special dividends back to shareholders.”
“So, you have not only had this full-on capital appreciation but you also had superb dividends. It won’t last for ever but there are so many problems across the market and this area has had such a great run that it is tempting to take profits but for me, the due to the fact they are predicting to pay these special dividends I will continue to be in the sector. However, it is one I need to keep an eye on.”
Not everyone is still bullish on house builders. The likes of Holly Cassell (pictured), assistant manager of the Neptune UK Opportunities fund, thinks house builders will not do so well as interest rates rise in the UK, which many expect will occur in the next year or sooner.
“In our view, [these] stocks appear overvalued and therefore vulnerable to policy developments,” she said.
Indeed, the sector has seen some weakness in the recent weeks ahead of the much vaunted decision on US interest rates by the Federal Reserve. Nevertheless, it has more broadly been strong over the four months of weakness across the UK equity market.
Performance of stocks and index over 6 months
Source: FE Analytics
Helal Miah, analyst at the Share Centre says Persimmon’s, as well as other house builders’ recently released numbers, suggest the sector is in rude health.
“[The] figures reflect the robust conditions in the UK house building sector where there is a clear supply demand imbalance and we believe that there is still some time to go before we reach equilibrium. Demand will remain strong as employment levels and wages rise, mortgage rates remain low and consumer confidence remains robust.
“Persimmon’s management, like most in the sector, also take this view and investors should acknowledge that it is continuing to acquire land and plots, and securing planning consent for development.”
Curtis is one of the longest serving equity income managers in the UK’s open-ended and closed- ended universes having headed City of London since 1991.
His trust has returned more than the FTSE All Share index in nine of the past 10 full calendar years – having lagged in the bull market of 2009 – and is second quartile in 2015 so far in the IT UK Equity Income sector.
The trust has returned 347.8 per cent since July 1995 – as far as our data goes back. By comparison, the IT UK Equity Income sector average over this period is 273.56 per cent while the FTSE All Share has gained 243.8 per cent.
Performance of fund, sector and index since 1995
Source: FE Analytics
City of London has an ongoing charges figure (OCF) of 0.44 per cent and current dividend yield of 4.1 per cent. Curtis increased his gearing recently in the turmoil, where he bought into the dips, to 9 per cent.